2002 PLP 276 (CLD)

The plaintiff, a private limited Company engaged in textile business and is a customer within the meaning of section 2(d) of the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 (hereinafter referred to as the _ Act), whereas, the defendant is a Banking Company within the meaning of section 2(a)(ii) of the Act. On the request of the plaintiff, the defendant granted Morabaha. (purchase and sale) finance facility, which was availed by the plaintiff vide. Morabaha Agreement dated 23‑5‑1996 as security for re‑payment of the sale price under the agreement. The plaintiff pledged with the defendant 14,74,000 shares of Muhammad Farooq Textile Mills Limited under the Murabahah agreement. The plaintiff was required to pay an amount of Rs.82,07,500 as sale price in terms of Murabahah agreement (Annexure C) payable in three instalments on date with amount specified therein as follow:‑‑ 20th July, 1996 Rs.4,02,500 20th October, 1996 Rs.4,02,500 20th January, 1997 Rs.74,02,500 According to the plaintiff, the first two instalments were paid on 17th July, 1996 and 21st October, 1996 respectively, whereas, the balance amount was paid beyond the agreed dated in instalments as follows:‑‑ 10th April, 1997 Rs.7,60,278 . 30th September, 1997 Rs.7,65,000 31st January, 1998. Rs.5,42,548 30th June, 1998. Rs.6,61,643 31st October, 1998. Rs.5,42,548 31st January, 1999. Rs.5,04,809 12th March, 1999. Rs.10,00,000 12th March, 1999. Rs.5,00,000 19th November, 1999. Rs.4,93,126 The plaintiffs case is that the entire Murabahah sale price of Rs.82,07,500 stands liquidated. Despite the payment of entire amount Murabahah (sale price), the defendant are avoiding to release/return the pledged shares and no other amount is due or payable by the plaintiff to the defendant. The plaintiff is entitled for the return of shares pledged by it in favour of the defendant. The defendant is not entitled for any interest under Murabahah agreement. Thus the suit was filed with the following prayer:‑‑ (a) For a declaration that the plaintiff is the lawful owner of shares earlier pledged to the defendant and has paid the entire amount, required to be paid under the Murabahah Agreement by the plaintiff to the defendant in respect of the Murabahah Agreement. (b) For an injunction restraining the defendant from selling or transferring the shares pledged by the plaintiff in favour of the defendant as are more specifically described in para. 4 of the plaint. (c) For a mandatory injunction, directing the defendant to release and return to the plaintiff the shares pledged by the plaintiff in favour of the defendant as are more specifically described in para. 4 of the plaint. (d) Any other relief which this Hon'ble Court may deem fit and proper in the circumstances. (e) Costs of the suit." The defendant on service of summons in terms of section 9 of the Act has filed the application for leave to defend the suit in terms of section 10 of the Act. The plea raised through the application was that on failure of the plaintiff to pay the three instalments, the parties had entered into a fresh agreement for financing which is reflected from the correspondence exchanged between them filed alongwith affidavit. The plea, precisely has been taken in para. No.7 of the affidavit. Reference has been made to the letter dated 13‑3‑1999 (Annexure D/24), which bears endorsement of acceptance. On that basis it has been pleaded that the parties have agreed to the renewal of the facility upon payment of mark‑up at the rate of 23%. Such agreement was in substitution of the earlier agreement and the defendant would be within its right to enforce the security in terms of letter of pledged dated 12‑12‑1998. It was further pleaded that whether the plaintiff is liable to pay further/additional amount to the defendant after the expiry of Murabahah agreement and whether the defendant is entitled to receive mark‑up from the plaintiff at the rate of 23% as claimed by the defendant, cannot be, decided by this Court without examining the respective evidence of both the parties. I have heard Mr.Yawar Farooqui, learned counsel for the plaintiff and Mr.Nadeem Akhtar, learned counsel for the defendant. Mr.Nadeem Akhtar, learned counsel for the defendant in support of the application for leave to defend has contended that no doubt the Murabahah facility was granted to the plaintiff with a schedule of payment (Bai'Mu'aJjal). On failure of the plaintiff to pay the last installment, on the request of the plaintiff fresh agreement for financing was executed between the parties and he referred the correspondence exchanged between the parties filed alongwith the affidavit. Mr.Nadeem Akhtar, learned counsel for the defendant has referred the letter dated 13‑3‑1999 (Annexure D‑24), which reads as follows:‑‑ March 13, 1999. Mr.Farooq Sumar, Chief Executive, Textile Management (Pvt.) Limited, Finlay House, I.I.Chundrigar Road, Karachi. Murabahah Facility of Rs.7 Million Dear Sir, We write with reference to your letter, dated February 15, 1999 and the subsequent meeting with your Mr.Yaqoob Zamindar and Mr.Burhanuddin with the undersigned when we expressed our concern for your not implementing the promise to settle the outstanding by January 31, 1999 as called for in our letter, dated January 21, 1999. However, taking cognizance of the circumstances explained by you about your inability to settle the dues by 31st January, 1999, we have, with some difficulty, agreed to your undertaking to re‑pay the outstanding by making an initial payment of Rs.1.5 million forthwith and the balance in four equal instalments so as to liquidate the entire outstanding plus mark‑up at the existing rate of 23% latest by 31st January, 2000. Please provide us a revised re‑payment schedule and return the duplicate of this letter signed by Mr.Farooq Sumar, Chief Executive and the authorised signatory, in token of having accepted the foregoing. Regards. Yours faithfully, Accepted subject to our letter dated 12‑4‑1999. FOR TEXTILE MANAGEMENTS (Pvt.) Limited. (Sd.) Dr.Amjad Waheed Head of Asset Management. (Sd.) (Sd.) FAROOQ SUMAR BURHANUDDIN RAJAB ALI, CHIEF EXECUTIVE COMPANY SECRETARY On the basis of above letter, Mr.Nadeem Akhtar's contention was that a fresh agreement came into existence between the parties and in substitution of earlier agreement and the defendant would be within its right to enforce the same and until the payment is made the pledged, shares cannot be released. Mr. Nadeern Akhtar, learned counsel for the defendant has contended that it was a novation of contract and referred unreported judgment dated 8‑1‑1999 of Division Bench of this Court in Special High Court Appeals 'Nos.186 and 187 of 1998 Messrs Yousuf Hardware Industries and 50 others v. United Bank Limited, wherein it was held that by executing the finance agreement, the appellant's liability on the basis of original contract/agreement was extinguished and the earlier agreement as substituted by another finance agreement/contract. Reference was made in this connection by the Division Bench two reported cases (1) Abdul Qayoom v. Ziaul Haq and another PLD 1962 (W.P.) Kar. 334 and (2) Ghouri Dutt Ganesh Lall Firm v. Madho Prasad and others AIR 1943 P.C.

147. In Banque Indoseuz v. Banking Tribunal for Sindh and Balochistan and others 1994 CLC 2272, wherein.the original facility for advance credit on the basis of interest was converted on non‑interest basis which was substitution of new obligation for old one is known as novation of contract. Right of the parties under the original contract must be completely extinguished giving way to the different right under the subsequent agreement. On the basis of above dictum, the counsel of the defendant has tried to raise a bona fide and series dispute, which according to him requires evidence and urged that leave to defend the suit may be granted unconditionally. Mr:Yawar Farooqui, controverted the contention raised by the learned counsel for the defendant for leave to defend, by contending that the sale price has been paid by the defendant though with delay. Murabahah (Bai'Mu'aijal) cannot be restructured or roll over and the defendant by withholding pledged share, is taking advantage of its position which is not permissible in Islamic system of banking and referred the judgment rendered by Mr.Justice Mushtaq Ahmed Memon (as he then was) in United Bank Limited v. Messrs Sarhad Ghee Mills Limited and 13 others 1999 YLR 323, wherein learned Judge has observed that under the Islamic system of banking, a lender has to act reasonably and cannot take advantage of its position, on such reason in spite of condition containing the application for leave to defend, letter of credit the claim for mark‑up was not allowed. He further contended that by agreement through correspondence, the defendant is claiming mark‑up over the mark‑up which is also not permissible under the law. It may be stated that State Bank of Pakistan has issued BCD Circulars for shifting of interest based Banking System to Islamic mode of financing and elimination of 'Riba' from Banking System. The Circular No. 13 was issued on 20th June, 1984 and as from 1‑1‑1985 all finances provided by a Banking Company to the Federal Government, Provincial Governments, public sector corporations and public or private joint stock companies were be only in any one of the modes indicated in Annexure I. The trade related modes of financing were categorized in Annexure I of B.C.D. No.13;, and one of the modes of financing by purchase of goods by bank and their sale to clients in terms of clause (I) of 'B' of the amount as under:‑‑ (A) Financing by lending:‑‑ (i) Loans not carrying any interest on which the banks may recover a service: charge not exceeding the proportionate cost of the operation, excluding the cost of funds and provision for bad and doubtful debts. The maximum service charge‑ permissible to each bank will be determined by the State Bank from time to time. (ii) Bard‑e‑Hasana loans given on compassionate ground free of any interest or service charge and repayable if and when the borrower is able to pay. (B) Trade‑related modes of financing including the following:‑‑ (i) Purchase of goods by banks and their sale of clients at appropriate mark‑up in price on deferred payment basis. In case of default, there should be no mark‑up on mark‑up. (ii) Purchase of trade bills. (iii) Purchase of movable or immovable property by the banks from their clients with Buy‑Back Agreement or otherwise. (iv) Leasing. (v) Hire‑pur6hase. Financing for development of property on the basis of a development charge. The mode of financing under clause (B) of the Annexure I of B.C.D. Circular No. 13, purchase of goods by bank and through sale to client at appropriate mark‑up in the price on deferred payment basis; is called Bat' Mu'aJJal (sale on deferred payment basis), which is called 'Murabahah', Murabahah, one off the modes in Islamic System, where a seller agrees with his purchaser to provide him a specific commodity on a certain profit. added to his costs, it is called a Murabahah transaction. The basic ingredient of Murabahah is that seller discloses the actual costs, he has incurred in acquiring the commodity and then adds some profit thereon, which may be in lump sum or may', be based on a percentage, in its original Islamic connotation is simple sale with a distinguished feature form other kinds of sale, the disclosure of actual costs and profit charged. The due time of payment can be fixed either with reference to a particular date, 6r by specifying a period, like three months, but it cannot be fixed with reference to a future event the exact date of which is unknown or is uncertain. The price must be fixed at the time of sale. Once the price is fixed, it cannot be decreased in case of earlier payment, nor can it be increased in case of default. The buyer may be asked to promise that in case of default, he will donate some specific amount for a charitable purpose. In such cases, seller may receive such amount from the buyer, not to make it as part of income but to use it for charitable purpose on behalf of the buyer. In Murabahah financing, if buyer defaults in payment of the price at due date the price cannot be increased, though, in interest based loan, the amount of loan keeps on increasing according to the period of default. In Murabahah financing once the price is fixed it cannot be increased. Murabahah transaction cannot be rolled over for a further period, it is not permissible, whereas, in the interest‑based financing, if a customer of the bank cannot pay at the due date for any reason, he may request to extend the facility for another term. If the bank agrees, the facility is rolled over on the terms and conditions mutually agreed at that point of time, whereby the newly‑agreed rate of interest is applied to the new term. The concept of Murabahah cannot be misunderstood as a mode of financing, analogous to I the interest‑based loan by using the concept of roll over. In I Murabahah, if the client requests the bank to extend the maturity date of Murabahah, to roll it over and extend the period of payment on an additional mark‑up charged from the client which practically means that another separate Murabahah is booked on the same commodity. Such practice is totally against the well settled principles of Shariah. Even rescheduling of payment in Murabahah is not permissible. If, the instalments are rescheduled, no additional amount can be, charged for the rescheduling. The amount of Murabahah price will remain the same in the currency (refer chapter Murabahah of an Introduction of Islamic Finance by Muhammad Taqi Usmani). I have already referred sub‑clause (1) of clause (B) of Annexure I of B.C.D. Circular No. 13, which prohibits changing of mark‑up on mark‑up in case of delay in deferred payment. Thus delay in payment would not carry any additional amount over agreed sale price. In Dr.M.Aslam Khaki v. Syed Muhammad Hashim PLD 2000 SC 225, a reference has been made to Holy Qur'an which says that if he (debtor) is poor, he must be given respite till he is well off. It was further held that if the purchaser delays the payment despite his ability to pay, he may be subjected to the different punishment but cannot be taken to be source of further return to the seller on per cent per annum basis as contemplated in section. 79 of Negotiable Instruments Act. The view taken by the Supreme Court confirms the direction contained in the circular referred to above and is in consonance with principle of Murabahah. The transaction of sale and purchase is complete and the bank become an unpaid seller, customer is only liable to pay the repurchase price. The judgment referred by Mr. Nadeem Akhtar rendered by the Division Bench of this Court, no doubt have binding force on any other Court, which may be subordinate to it. I, sitting on original side as single Judge will be bound of Division Bench. I have, therefore, perused the said judgment. The principle expounded by my leaned brothers, are not applicable to the present case and the facts are distinguishable from the present case. In the instant case, admittedly the entire sale price has been paid by the plaintiff but beyond the stipulated period. The role over or re‑structuring is not permissible in Murabahah. In case the purchaser is unable to pay instalment on due date, the bank can extend the period of re‑payment but cannot charge anything over and above the purchase price. Therefore, any agreement for extension for payment with further mark‑up would be against the public policy in terms of section 23 of the Contract Act. Therefore, the defendant cannot claim any amount over and above the sale price, which has been paid to the defendant. No bona fide and serious dispute has been raised, therefore, the application for leave to defend is dismissed and suit of the plaintiff is decreed as prayed with no order as to costs. Q.M.H./T‑17/K Suit decreed.